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Digital supply chain boosts operational efficiency and raises risk concerns

Digital supply chain boosts operational efficiency and raises risk concerns

More businesses are now integrating digital supply chain initiatives into their operations. In Asia, digitalization ushers “supply chain 4.0.”

More businesses are now integrating digital supply chain initiatives into their operations. In Asia, digitalization is at the forefront of ushering the shift to the dubbed “supply chain 4.0.” It is where new technologies play a crucial role in streamlining business processes.

An example is the collaboration between Malaysian Airlines and GE Digital, which is a software and Internet of things (IoT) services provider. GE Digital’s Fuel Insight and Fuelpulse aviation software aid in catering to the airline’s initiatives on sustainability as well as in the modernization of its fuel efficiency program. 

Although Malaysian Airlines have yet to release further data on the said cooperation, GE Digital’s past partners from the supply chain network have shown positive results. Among others, Gerdau, a steel producer,  was able to get their return on investment in 8 months, almost half of the initial 18 months target.

The total savings of Gerdau reached $4.5 million in a year for an investment of $1.5 million. Gerdau also experienced a 5% lower freight cost. Also the raw material inventory became faster, from 3 days to 7 minutes.

Meanwhile, according to a survey done by the Hongkong and Shanghai Banking Corporation (HBSC) with over 400 financial decision-makers from organizations across nine markets in Asia Pacific, 76% are expecting to increase levels of supply chain digitization.

Digital supply chains are geared to be a faster and more effective alternative to traditional models. Unlike the latter, which notes production and distribution, a digital supply chain focuses on consumer needs.

With the application of the IoT, automation, and networking, digital supply chain management renders customer-centric workflows. Wherein, the focus is on responsiveness, recognition, and resilience, which are essential in logistics and supply chain management.

The use of various digital supply chain technology enables micro-segmentation and mass customization, where customers are managed in smaller segments. It allows customers to choose from multiple products that fit their particular needs. 

Pros of using digital technology in supply chain

A digital supply chain usher efficiency by eliminating the need for manual processes. Tools such as cloud computing, artificial intelligence, and blockchain make planning and managing the operation of a supply chain company easier.

Notably, access to the external and internal data structures provides better visibility into the supply chain management from getting materials to product delivery. The gained visibility will help to learn more about how supply chains operate while lowering the risk involved.

“As many companies move into a recovery stage (after the pandemic) to stabilize supply chain operations and manage demand-side shocks, the opportunity to seek renewal through new, longer-term digital strategies also arises,”

Anne Petterd, Head of International Commercial & Trade, Asia Pacific at Baker Mckenzie, an international law firm

It lessens downtime and increases communication efficiency. In this case, making decisions becomes quicker due to the reduced delivery time of updates and will result in faster operations. Furthermore, the monitoring of products in a digital supply chain industry 4.0 will be easier with better reverse flow.

The COVID -19 crisis has made the gap in traditional supply chain management in sudden situations apparent. This raised the need to analyze supply chain resilience and alternative supply chain network for crucial parts and materials.

For example Apple aims to have sustainable production. In 2021, they were forced to cut back on their production due to the global chip shortage caused by a lack of supply of parts.  Apple is now breaking away from their traditional chip makers and opting to use in-house chips.  

Another effort that they did is to diversify production by doing production in India and Vietnam. In the past, Apple have relied only in China. Through diversification and usage of in-house chip parts, they can address concerns related to supply in the future.

Post-pandemic conditions have forced companies to choose between “just-in-time” (JIT) and “just-in-case” (JIC) inventory management and manufacturing models. Both ushers supply chain agility that aid in their ability to adapt to changing market conditions.

The JIT model enables companies to prevent going beyond usual production. It reduces wastage and production costs.

 “The pandemic made it apparent that supply chain managers can no longer simply focus on striking a balance between cost and performance. Instead, additional elements such as agility, resilience or sustainability need to be considered,”

Dr. Matthias Hodel, SVP, Global Head Customer Development Integrated Logistics at Kuehne+Nagel noted.

He added that digital technologies enable JIT models to meet these new requirements. Such a supply chain will not only be cost-efficient but also more agile and more resilient.

Meanwhile, the JIC model protects organizations from unexpected supply delays. It also shields against more demand, or dealing with a spike in the cost of materials. Organizations can improve their operations to adapt through data-driven technologies in supply chain management. These are machine learning and predictive analytics.

Overall, digitalization can augment JIC and JIT models when they are used in supply chain management.  As per the report by IoT analytics, market insights, and business intelligence provider, the digital supply chain is expected to grow at 8.1% ever year from 2022 to 2027. 

Cons in Supply Chain 4.0

Apart from the benefits, a supply chain digital transformation has a fair share of downfalls. To properly address such concerns, there is a need to raise awareness on prevention and mitigation.

Cyber security risk is high when doing digital solutions. Often, software and hardware may become the target of cyber attackers, which causes supply chain problems. Digitalization makes the supply chain transparent for all the parties involved, which, when hacked, will hamper workflow.

Digital business insurance company Embroker coined a list of the top cyber security threats in 2022.  The top three are social engineering, leading people into getting access; third-party exposure, breach from third parties; and configuration mistakes, errors that can be hacked.

Ransomware is also a threat to watch out for. It includes malware that blocks access to the system or important files.  The hackers ask for a ransom in exchange for giving back access. Kaspersky Security Network has found 804,513 cases in Southeast Asia on 2020. Although, the cases is 58% lesser than in 2019, it is still high.

Software updating can help protect computers from cyberattacks by fixing bugs and improving fuctionalities. However, an outdated information within digital supply networks can make it difficult for the IT team as they can miss important dates for software updating. 

As a result, they may face license infringement because they don’t meet agreement terms, use rights, and risk aversion measures of the old and current contracts. With infringement, there is a potential huge pitfall in business confidence from the customer. 

Meanwhile, concerns on whether high investment cost can justify the financial returns, arises.  Based on the paper “ Digital Supply Chains: A Frontside Flip,” of The Center for Global Enterprise, it was found that companies that did digitizing saw a 50 % reduction in supply chain cost. 

However,  using digital technologies can alter financial gains. Digital supply chain management depends heavily on technology, and the operation costs are high. Some businesses may consider it an opportunity to improve their profit as they finds it hard to substantiate the hefty investment that may take time to have a return on investment.   

Another problem to note is that any disruptions in power or downtime in network access could mean that the data will remain inaccessible by any other means. The complexity and fast-paced advancement of technology in supply chain also make maintenance challenging. This, in turn, leads to the demand on skilled workers that are difficult to hire and comes at a higher cost.

Training employees on new technologies and systems is time-consuming and costly. There is a possibility of high employee turnover due to a lack of opportunities for career development. Failure to create a solid workforce can disrupt the supply chain and logistics.

Adoption of digital supply chain

Due to the rapidly growing demands of customers, the shift from traditional to digital supply chain management in Asia is becoming apparent. Prioritizing the customer service experience makes digitalizing the supply chain for services highly-dynamic.

The benefits of using digital supply chain management strategy planning and operation include the streamlining of processes.  With the aid of technologies, it renders real-time updating and transparency. On the other hand, the primary counterpart is the dependency on digital technologies, which are costly.

Adopting supply chain digitalization can help businesses manage the flow of their goods and services while meeting customer demands. Digitalization will boost operations in an agile, efficient, and transparent manner if they learn to deal with plausible downfalls systematically.

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